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20 March 2014 0 Comments
Posted in Opinion, Private Client

And good riddance to annuities!

Posted by , Partner

In a move that took everyone by surprise, Chancellor George Osborne has announced in his Budget that he is to scrap almost all of the restrictions on drawing pension income.

He clearly recognised that in these days of defined-contribution pensions the old systems were not working.  Annuities offering a guaranteed income for life had become appalling value for money, so the Chancellor made the alternative – pension drawdown – the new norm.  He has raised the drawdown limits considerably, and is clearly not too worried that pensioners will run out of money and become a burden on the state.

Quite right too – there is now so much information available free on the web that each pensioner can, if he or she wishes, become an investment guru.   Well, it’ll keep them off the streets . . . .

But the Chancellor did not stop there.  From April 2015, pensioners will be able to take their entire pension pot as cash, and use it for whatever they like.  There is, of course, a catch.  In the tax year they take the lump sum, it will be treated as the top slice of their income, so for many it would be taxed at 40%.  The remaining 60% also becomes part of the pensioner’s estate for Inheritance Tax purposes.  The crafty old Treasury have calculated this will raise an extra £1.2 billion in tax by 2019.

The more prudent pensioners will, however, resist this temptation.  They will appreciate that with no need to cash everything at 65, they can invest for the long term – and that means investing in the stock markets, as that will give the highest returns.  Given a reasonable level of pension drawn down, an average annual return of 10% would mean that their pension funds, far from running out, would grow in value.

We are about to become a nation, not of shopkeepers, but of pensioner investors.  And I think I’ll go and buy some shares in stockbrokers . . . .

If you have any comments on this blog please contact Roger May on 020 7583 2222 or rdm@royds.com

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